Institutional Investors, Corporate Governance and the Performance of the Corporate Sector

Proportions of equity held by institutional investors are rising across all OECD countries. Paradigms of corporate governance involving a key role for institutions are market control via equity (the takeover sanction), market control via debt (LBOs) and direct control via equity (corporate governance activism). Even in countries where institutions are currently unimportant to corporate governance (where relationship banking or direct control via debt prevails) there are tendencies to switch towards these “Anglo Saxon” approaches, inter alia due to pension reform and EMU. Existing evidence at a micro level for favourable effects of the three Anglo-Saxon mechanisms on corporate performance is mixed, but on balance positive. We contend that these micro studies face a difficulty that they cannot capture effects of governance initiatives going wider than “target firms”. A better measure of institutions’ overall effect is analysis at a macro level. Accordingly, we present results for the empirical relationship between institutional share holding and corporate sector performance at an economy wide level. These are consistent with marked effects, which often differ between “Anglo Saxon” and “relationship banking” countries. For example, institutions appear to restrain investment and boost dividends in the former.